China china china...

Saturday, November 15, 2008 | posted by RedApple
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China - why do we care so much: because the world is pinning on the hope that China can somehow keep growing without the exports to developed markets and hence give the financial market a glimmer of reflation hope rather than the worries of global depression in our heads. It is clear that Chinese government (like every other country) will need to spend, spend and spend. Since it is much easier to socialize/nationalize spending and rather than let public sector redirect investment through the economic system when risk aversion is clogging the money flow, we will see many more Government led initiatives in China and many other countries. If domestic growth is the top agenda, China will seek to borrow more money through developing its bond market and possibly keeping its currency strong for cheaper imports. I also expect China to start stockpile essentials commodities during this economic cycle.

Let's have a quick review of the Chinese economy:

1. Only China out of the G20 is not officially in recession. (see my recent post7 Nov 2008 - Gold Boom Doom - China Slow Down - Reflecting on Jeremy Grantham's commentary ). Chinese GDP growth is estimated to be 19% this year and Chinese government is trying to keep long term growth above 8%. The lowest 2009 GDP growth estimate is around 5%. So all in all, we are still talking about growth but at substantially lower rate which may not be enough to turn this global recession into global growth.

2. Chinese export is slowing (see 13 Nov 2008 - New York Times - Factories Shut, China Workers Are Suffering). We believe that this is unavoidable. Chinese government is also acknowledging that their growth mix will change.

3. Chinese oil import is increasing and has not decreased even with the export slow down suggesting that oil consumption is NOT entirely linked to its export.

4. Chinese has cut rate has following the world central banks and cut rate in acknowledgement of a global slowdown:

5. China has just release a $586bn stimulus package (see 15 Nov 2008 - WSJ - Beijing Reveals Small Parts of Big Stimulus. The latest information is that the stimulus is focused on the domestic infrastructure projects across China. China is also re-opening the bond market of the local governments. Something that we clearly mentioned is China (and other emerging market) needs a more developed Debt market.
WSJ says that: Yi Gang, a deputy governor of the central bank, noted at the news conference that since the reserves are foreign currency, they can't directly be used for domestic spending. "These reserves are unavoidably invested abroad," he said. This confirms 2 things in my mind: 1. they are moving towards a domestic growth policy. 2. FX reserves maybe left alone. Even though they will still need to reinvest their FX reserves, since the export is slowing, we do not know if there will be additional buying of Treasury.

6. A comparison of the present Chinese economic condition versus Asian Crisis (source WSJ).

I would like to highlight a few points from the chart below:
- Chinese is an oil/energy hungry nation. Their oil import has not slowed down (given this oil price, I suggest that they may even stockpile for their future)
- Chinese consumer consumption is very low and is not expected to be the core growth driver. We will look for large government spending to the core driver in the coming years. Therefore the stimulus package announcement this week is a very important confirmation that Chinese will do its best to keep the growth engine humming
- Even though the FX reserve and FDI are expected to slow, they are coming down from a high level which will offer some cushion to the global slowdown.

Gold Buying in Middle East

Saturday, November 15, 2008 | posted by RedApple
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Gulf news reported that there has been over 3.4 billion dollars of gold buying in the past 2 weeks reflecting increase gold reserve amongst Saudi investors: 12 Nov 2008 -Gulf News - Gold demand rises in Saudi Arabia